Seagate, Western Digital Ready For 'Hybrid' Data

As cloud data use grows in 2014, companies likeSeagate
Technolgy (
STX
),Western Digital (
WDC
) andEMC (
EMC
) will be vying for the best spots in the new "hybrid"
data-storage environment.

This promises to be the year that data storage has it both
ways -- as more storage buyers choose to outfit their companies
with packages including both cloud and traditional storage, say
industry observers and insiders.

"Organizations will continue struggling with this issue,"
Kagansky said, "but I think 2014 is (when)organizations will
accept that the hybrid approach is the best option for business
today ... a balance between convenience and control."

Hard Drive Vs. Flash Drive

Western Digital and Seagate mostly make hard drives for
consumers and enterprise customers. Most individual consumers use
hard drives -- internal components that employ a spinning metal
disk -- as the primary storage on their laptops or home
computers. The new "flash" or solid-state drives, SSDs, perform
basically the same function, but are made from chips and
circuitry using no moving parts. SSDs are smaller and more
portable -- witness the so-called thumb drive -- reasons for
SSDs' growing popularity and use in tablets and smartphones.

SSDs are said to be a bit quicker than traditional hard
drives, but they're also a newer technology with a higher
cost.

Buyers ofApple 's (
AAPL
) iMac desktops have the option to configure their computers with
SSD storage instead of a traditional hard drive. Putting 512
gigabytes of flash storage now costs buyers $500 more than the
same computer configured with a 1 terabyte HDD.

On the level of corporate customers, where hybrid cloud
storage is taking hold, network servers have begun adopting
designs blending SSD and HDD technologies into hybrid flash
arrays. Names likeNimble Storage (
NMBL
),Fusion-io (FIO) and privately held Tintri and Tegile are
players in this territory.

EMC is a leader in managing customer data, selling virtual
infrastructure software ranging from information security to data
archiving. Most of its customers are IT departments.

To survive these increasingly complex iterations of the data
storage story, hard-drive makers have consolidated as they
struggle to keep costs down and margins growing. Hard drives have
high manufacturing costs and complex designs, says Brian Cox,
senior director of outbound marketing forSanDisk (SNDK), which
makes competing solid-state drives.

"We have seen the shakeout in the hard-drive industry," he
told IBD, "from over 100 suppliers to down to just three
today."

The consolidation is seen continuing. Seagate in December
announced it would pay $372 million in cash forXyratex (XRTX),
which is its largest equipment-testing partner.

"We see this acquisition as very opportunistic for STX, as it
allows the company to vertically integrate its manufacturing
process even further," wrote Brean Capital analyst Ananda Baruah,
who rates Seagate stock a buy with a price target set at 70.

The acquisition shows Seagate wanting to be a key supplier to
cloud storage providers, Piper Jaffray analyst Andrew Nowinski
wrote
at the time
.

Despite the challenges, investors have been driving the stocks
higher. Seagate stock gained 89% last year and has added 8% so
far this month. Western Digital jumped 103% for 2013 and another
4% in January.

Those gains, aided by Nimble's 114% romp since its December
IPO, helped hoist the Computer-Data Storage group to a No. 24
rank among IBD's 197 industries, up from a No. 173 ranking at the
start of December.

Most Wall Street analysts remain optimistic about the future
for traditional data storage companies. Sixteen of 25 analysts
polled by Thomson Reuters rate Western Digital a buy. And 35 of
44 analysts rate EMC a buy. The majority of analysts polled by
Thomson Reuters have a hold rating on Seagate.

The shift toward flash-based SSD storage might already be
moderating, according to JPMorgan analyst Mark Moskowitz, who in
December upgraded Western Digital stock to overweight, or
buy.

"Our research also indicates the rate of change away from HDDs
to flash-based storage in PCs, servers, and storage is not
accelerating as previously feared," wrote Moskowitz in a research
report.

The SSD industry will be shipping some 72,000 petabytes of
SSDs by 2017, up from about 5,800 petabytes in 2012, according to
Gartner data. A petabyte is a billion gigabytes.

That is a small fraction of the hard-drive market, which ships
some 500,000 petabytes of HDD drives each year, according to
Moskowitz.

The market for external storage devices and services also has
suffered as more businesses and consumers move to cloud storage.
This includes the cheap -- or free -- storage offered by startups
like Dropbox, a company that in mid-January raised $250 million
in new funding, giving it a potential market value of about $10
billion, according to the Wall Street Journal.

2 Gigabytes For Free

Dropbox is a cloud storage service that offers users up to 2
gigabytes of space for free. Businesses can put their data in the
cloud via DropBox for about $15 per month per employee. The
global external-storage market, made up mostly of disk-based data
storage, is led by EMC and NetApp. It's likely that that market
contracted about 2% in Q4 from the year-earlier period, wrote
Barclays Equity Research analyst Ben Reitzes. Revenue fell 3.5%
in Q3, according to research firm IDC.

But the U.S. should show stronger sales than some other
regions, according to a poll of retailers Reitzes' team undertook
in December.

"We still believe EMC and NetApp should ... perform better
than the storage market," wrote Reitzes.

Growth in data storage spending in the long term should
outpace general enterprise IT spending, which is good news for
firms like NetApp, wrote Morningstar Equity Research analyst
Grady Burkett in a recent report.

Network-storage gear maker NetApp is "well-positioned to
capitalize on this growth," says Burkett.

NetApp shares have surged 11% in January,
hitting highs
it hasn't seen since April 2012.

"Our research indicates key partners are doing better than
expected," wrote Lake Street Capital Markets analyst Eric
Martinuzzi, who rates the stock a buy, "and there has been good
follow-through into the new year."

For now, traditional on-site storage for both consumers and
enterprise customers still offers a much quicker read/write time
than its cloud competitors, says Codero Hosting CEO Emil
Sayegh.

Startups like Box and Dropbox, along with tech giants
likeGoogle (GOOG) andAmazon.com (AMZN), are beefing up their
offerings in an attempt to attract consumers.

"Will 2014 be the year that cloud storage takes over
traditional storage?" Sayegh asked in an email. "Probably not
yet."